PRIVATE PARTICIPATION

The Strategy Angola 2025 assumes the ambition of “transforming Angola into a prosperous, modern, poverty free country...”. The existence of a stable, secure, competitive and sustainable power sector is a necessary condition for this ambition to come true and for the development of the country.

The ambition of the Strategy Angola 2025 motivates a strong ambition for the Angola Energy 2025 Vision. The planned investments in production, transmission and distribution require a new investment cycle in the 2018-2025 timeframe estimated in $23,3b.
This new investment cycle, although higher than the one planned in the currently on-going Action Plan, will have a larger execution period resulting in a lower average annual investment ($2,9b per year vs. $3,6b between 2013 and 2017).

In the new investment cycle transmission – which was a priority until 2017 – will have a lower weight in favor of distribution. Without investment in distribution it will not be possible to electrify 60% of the population and consumption will not reach the predicted levels, postponing the need for more generation. On the other hand, investing in distribution without investment in generation will result in repressed demand, blackouts and in the need for generators which will cause Angola to be less competitive for the industries it is trying to attract. The investment in generation will therefore have to be accompanied by investment in distribution.
Without investment in either generation or distribution, Angola will continue to be under-electrified and the opportunities and aspirations of Angolans limited. The realization of the vision Angola Energy 2025 requires the capacity to mobilize such high levels of investment.

The current investment model, which relies almost exclusively in the National Budget and in public investment, is not what is intended for the 2018-2025 timeframe.

The vision Angola Energy 2025 is a vision of an economically self-sustainable sector in which the development of the country and the outstanding energy resources which it disposes will allow the sector to pay for its own investments, thus releasing part of the National Budget to be invested in other sectors that will improve Angolan’s well-being and the economic capability of paying for the energy services they use.

It is therefore fundamental, in the 2025 horizon, to:

Guarantee the capacity of the sector to generate revenues that will allow supporting investments in the medium and long term.

Reduce the level of public investment and increase the participation of the private sector, with a particular focus in fundraising, implementation and efficiency.

Economic sustainability of the power sector

The realization of the vision Angola Energy 2025 begins by placing efficiency in revenue collection amongst the top priorities of the power sector in Angola. Only if the distributed kWh are metered and paid for by their consumers can the sector generate enough revenues to cover its operating costs and its needs of investment.

Controlling, monitoring and inspection of energy losses, the end of estimated consumptions and the generalized installation of pre-paid meters, the availability of practical and accessible means of payment, the expansion and optimization of the collection agents system and the progressive concession or sub-concession of distribution areas to private entities should constitute the first long-term priority of the sector.

The second long-term priority concerns the progressive update of power tariffs. Urban areas, where purchasing power is higher, will represent 90% of the consumption by 2025. Services will represent around 30% of the consumption. The conceived idea that consumers do not have the capacity of paying for energy services is erroneous. The comparison shown in the graphic below demonstrates that the majority of African consumers currently pay between $100/MWh and $200/MWh.

ELECTRICITY PRICE IN THE REGION (IEA, 2013)

The following figure presents the global generation, transmission and distribution cost of power in 2025 without any kind of subsidy. Angola benefits of highly competitive generation options – such as hydropower and natural gas.
An average fee of around $110/MWh (in 2014 real terms) would allow the sector to cover its variable costs, including power purchase agreements, renewable’s additional costs and rural electrification, as well as recover – with longterm maturities and low remuneration – the great public investments supported by the National Budget or public financing.

During a dry year the system’s costs will increase due to a higher usage rate of the thermal power plants, being fundamental to plan mechanisms capable of managing the deficit during these years, namely the non-recovery of public investments in dry years.

Given the significant share that services represent in total consumption and the existence of consumers with higher purchasing power, an adequate tariff discrimination between segments would allow obtaining an average tariff of around $110/MWh (in 2014 real terms), maintaining a low social tariff for a limited quantity of power per client.
It is therefore possible to aspire having a self-sustainable sector from the financial point of view, with electricity tariffs competitive at the regional level and socially acceptable.

ELECTRICITY PRICE IN THE REGION (IEA, 2013)

Public investment and Private Sector participation

The main assets of the sector on generation, transmission and distribution have been so far acquired through public investment. Despite the fact that public investment presents advantages in what concerns works contract lower complexity and less financial costs associated to concessional loans, in many cases the participation of the private sector allows a better efficiency in investment decisions, risk mitigation and operations – constituting also an additional financing source for the sector.
The National Energy Security Strategy promotes the introduction of know-how and capital by the private sector as one of the main long-term strategic axis for the power sector.

Therefore, public investment in the future should be reduced and reserved for those infrastructures and activities that will remain under the public sector’s responsibility as well as those who benefit rural electrification, namely:

Large hydropower projects, which due to their dimension cannot be supported by private financing;

Transmission at Very High Voltage – activity which safeguards the national energy security;

Investments in distribution in areas that will remain under the public company’s responsibility as concessionowner of power distribution;

Investments in rural electrification, including generation, transmission and distribution in isolated systems, which shall be managed by the private entities in charge of the construction works.

The participation of the private sector must cover a total investment of $8,9b mainly in Production and Urban Distribution, assuming two main objectives:

Expansion of the investment while minimizing public support: the participation of the private sector should allow to proceed with the expansion of the sector’s investment plan, minimizing resorting to the National Budget (allowing to reduce the investment or public financing to only $1,7b a year in the 2018-2025 period);

Reach the economic self-sustainability of the sector: the participation of the private sector should be directed to projects that can be executed in a more efficient way by the private sector, either by optimizing investment and operating costs or by maximizing revenues. It is therefore fundamental that Distribution in urban areas and management of rural electrification projects integrate the program, given its crucial role in the generation of revenues and in the self-sustainability of the sector.

2018-2025 INVESTMENTS PER SECTOR

In the case of rural electrification, a Fund shall be created in order to support investment, while the management and maintenance of the created assets together with revenue collection will be guaranteed by the private contractor who builds the infra-structures.
While the sector does not reach financial sustainability, the increase in the participation of the private sector in financing investments requires the creditworthiness of the Single Buyer, which means that it must be able to honor payments under the contracts it signs.
It is fundamental that the Single Buyer does not suffer from financial imbalance. The regulator should therefore play an active role in helping the Single Buyer account for its future responsibilities, in defining a multi-annual financing plan, which should be associated with the creation of a framework program between the Single Buyer and the State, and in the creation of adequate credit enhancement mechanisms.

Finally, the future responsibilities of the sector must be managed so that, in the case of loans with medium term tenors or power purchase agreements supported by loans with medium term tenors, they will allow for the refinancing and extension of the payment schedules and tenors in order for the sector to be able to honor its payments in a financially sustainable way.